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UPDATE 1-Parties eye new Iceland govt amid fresh protest

(Adds new protest, quotes)

REYKJAVIK, Jan 31 (Reuters) - Parties aiming to form a new centre-left government for crisis-hit Iceland said on Saturday they were close to a deal.

Reminding politicians of the discontent that helped topple the previous centre-right prime minister, Geir Haarde, the first leader to fall as a direct result of the global crisis, some 2,000 people again demonstrated outside parliament.

Inside parliament, the Social Democrat Alliance and Left-Green Party held talks on forming a government to lead Iceland to elections between April and June.

“I am hopeful that a government will be formed this weekend, but I don’t have the exact timing yet,” prospective new prime minister, Johanna Sigurdardottir, of the Social Democratic Alliance, told reporters.

The crisis, sparked after Iceland’s fast expanding banks collapsed under a weight of debt, forced Iceland to take a $10 billion International Monetary Fund-led rescue package and caused widespread anger.

Haarde of the Independence Party quit on Monday after weeks of protests, which eventually turned violent.

A delay in the plan to wrap up government talks on Friday came after the Progressive Party, whose support the proposed minority coalition needs, said it wanted to have a closer look at the government agreement and propose some of its own ideas.

Left-Green leader Steingrimur Sigfusson said a deal could come “possibly later this evening, but more likely tomorrow”.

Progressive Party leader Sigmundur Gunnlaugsson also met with his officials and then went for further talks with the Left-Greens and Social Democrats. He, too, was upbeat.

“I do not see any bumps in the road,” he told reporters, adding a deal could come faster than expected. He had earlier said the parties should wait until Monday to announce a deal.

NEW DEMO

A fresh, peaceful, demonstration was held on Saturday, with some calling for wider change, not just a shift in government.

Proposals have been made in Iceland for a constitutional assembly that would overhaul the basic law, including a clearer divide between the executive and the legislature.

“You should be proud of yourselves, coming here weekend after weekend,” one of the organisers, Hordur Torfason, shouted to the crowd.

“The current political system is done for, what we want is a new grassroots organisation that will come and take power,” said Einar Indridason, 40, attending the demonstration.

Sigurdardottir, 66, was social affairs minister in the outgoing administration. She and the Left-Greens have said one of their first jobs will be to remove the central bank head who was strongly criticised for failing to foresee the crisis.

The coalition will likely have to tackle the issue of starting talks to enter the European Union.

Iceland has long been cautious about joining the bloc but support has grown during the crisis.

The Social Democrats back EU entry, while the Left-Greens are more resistant, but have said they may support a referendum on starting negotiations. Sigfusson has also backed a renegotiation of the IMF loan. (Editing by Katie Nguyen)

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